Airport express bus fares in Larnaca
Fictional classroom economic model. Named places, quantities, prices and concession conditions below are supplied scenario assumptions, not a report of current policy, business accounts or an actual recommendation. Larnaca Airport Express is a private bus operator with a concession at the airport. It currently charges €5 per single trip and carries 18,000 passengers per month. Fixed costs are €45,000 per month and variable cost is €1.50 per passenger. The operator proposes raising the fare to €6. A passenger survey suggests that at €6, 12% of current passengers would switch to taxis or shared vans and 5% would use the public bus instead; the remaining 83% would stay. The airport authority requires the operator to publish a single tariff, but the operator is considering a resident fare of €3 and a tourist fare of €7. Tourist demand is concentrated in summer and is thought to be less price-elastic than resident demand. The bus has spare capacity outside peak hours but is full at 07:00–09:00. The operator wants higher profit but fears losing the concession if service quality or passenger numbers fall sharply.
1. Calculate the price elasticity of demand implied by the survey and the effect of the €6 fare on monthly revenue and profit. Advise the operator.
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Passengers fall from 18,000 to 14,940 when price rises 5 to 6. The midpoint arc elasticity is(−3,060/16,470)/(1/5.5)≈−1.022; the initial-base finite ratio−17%/20%=−0.85 is a different convention and cannot justify an unchanged-revenue conclusion. Before: revenue 90,000, variable cost 27,000, fixed cost 45,000 and profit 18,000. After: revenue 89,640, variable cost 22,410, total cost 67,410 and profit 22,230. Revenue falls 360, while variable costs fall 4,590, so profit rises 4,230. Break-even at price 6 is 45,000/(6−1.5)=10,000 passengers under the supplied cost model. The forecast is survey-based and requires checking demand, capacity, service and concession constraints; the profit gain comes from the cost change, not a correctly applied inelastic-revenue rule.
2. Evaluate whether the operator should replace the uniform €6 fare with resident and tourist fares of €3 and €7. Refer to elasticity, arbitrage and regulation.
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Economic logic: Third-degree price discrimination can raise profit under suitable demand and cost conditions when two groups have different elasticities and the markets can be separated. Tourists arriving at the airport often have luggage, time pressure and few substitutes, so their demand is likely to be inelastic; residents know the public bus and can plan, so their demand is likely to be more elastic. Charging tourists more and residents less can increase total revenue without raising total capacity much.
Conditions: Separation must be enforceable. If tourists can buy resident tickets online, or residents resell tickets, the scheme breaks down. The operator would need ID checks or a resident card, which adds administration and queueing costs. The airport authority requires a published single tariff, so the scheme may breach the concession unless approved as a social tariff.
Welfare: Residents gain consumer surplus; tourists lose. If the tourist fare is too high, tour operators may redirect passengers to shared vans, damaging the concession. The resident fare of €3 is still above variable cost €1.50, so each resident trip makes a contribution.
Recommendation: Because the supplied concession requires a uniform tariff, do not implement a discriminatory fare without the authority’s approval and a lawful operating basis. If approval is obtained, assess demand, costs, privacy and enforcement before any trial. If separation costs exceed the revenue gain, keep a uniform fare and use off-peak discounts instead.